News & Publications
Red Flags that Lead to IRS Audits
To paraphrase Franklin Roosevelt, the only thing we have to fear is an audit. The most important thing to know about audits is that there is no guaranteed way to prevent one. Therefore, it should be no surprise that the most trusted way to prevent an audit is to ensure that your tax returns are filed timely, accurately, with integrity, and in accordance with sound accounting principles. Everything you do that causes your business to stand out increases your risk. Below I have listed several reasons that can trigger an audit and ways to minimize that risk.
Extravagant Expenses
Are you living the high life while your business struggles? The IRS will be curious how you purchased a new, luxury vehicle if your business reported a loss. Be certain to keep receipts and detailed records of business expenses. Furthermore, a bank account used exclusively for business transactions can make keeping records simpler and easier.
Round Numbers
A tax return consisting of many round numbers is a red flag due to the low odds of this occurring. Using large, whole amounts indicates that you are estimating rather than copying receipts as you should be doing.
Multiple Net Losses
A business losing money soon after inception is common. However, if you consistently record a loss, the IRS may wonder if your business is surviving with unreported income.
Filing Late
If you are too busy to file by the deadline, request an extension. Filing late can cause the IRS to take a closer look while also putting you on the hook for penalties and interest.
Excessive Deductions
Think twice before claiming your vehicle is solely for business use. Do you ever use this vehicle to get groceries or drop off your kids at school? Tax laws can be tedious and difficult to keep up with, but it is important to do so lest you deduct an expense that is no longer valid. For example, the 2017 Tax Cuts and Jobs Act eliminated the deduction for entertainment expenses. Now you will have to pay for that concert out of your own pocket when attempting to woo potential clients.
Cash Transactions
Cash may be king, but that shiny crown allows the IRS to easily spot you. Cash transactions are more difficult to verify. Keeping detailed records of all cash transactions will help you during audit defense. Additionally, if you run a cash-heavy business and receive more than $10,000 in cash in a single transaction or related transactions, you need to fill out Form 8300.
Tips for the Taxpayer
So, you did everything in your power to avoid being audited, but you were one of the unlucky ones randomly selected. Remember not to panic because you have followed the tips in this article and kept detailed records for all business transactions. If the Taxman does select you, read over the IRS Audits section for common questions so that you know what to expect.
How Can We Help?
Allyn offers tax compliance and consulting services for companies throughout the United States. Allyn has significant experience assisting businesses with reviews of their sales and purchases, nexus, registrations, and amnesty programs. As tax laws change and amnesty programs are created, we can use our experience to help your business improve compliance, minimize costs, reduce liabilities, and increased profits.
We can help your business maintain compliance with federal and state tax responsibilities and put procedures in place to ensure future streamlining of processes and increased data accuracy for tax purposes.
Allyn’s tax team is experienced in all aspects of Federal, state, and local tax compliance and consulting for large US and global corporations. We use that experience to your advantage.
Allyn files state and local sales and use, property, and license tax returns in every US taxing jurisdiction in addition to excise tax filings such as Federal Excise Tax, Heavy Highway Vehicle Use Tax, and International Fuel Tax Agreement returns. We can manage your tax compliance, create a solid tax process, and provide audit defense for your company.
Contact us and we can provide a customized cost-effective solution to meet your company’s needs. For further information on Allyn Tax services, please contact: tax@allynintl.com.
For More Information
If you are interested in learning more about this topic or other tax topics, please visit our Tax Publications under News & Publications at www.allynintl.com.
Contributor: Kyle Armstrong
About Allyn International
Allyn International is dedicated to providing high quality, customer centric services and solutions for the global marketplace. Allyn's core products include transportation management, logistics sourcing, freight forwarding, supply chain consulting, tax management and global trade compliance. Allyn clients range from small local businesses to Fortune 500 firms. Allyn conducts business in more than 20 languages and has extensive experience in both developed and emerging markets. Highly trained experts are positioned throughout North and South America, Europe and Asia. Allyn’s regional headquarters are strategically located in Fort Myers, Florida, U.S.A., Shanghai, P.R. China, Prague, Czech Republic, and Dubai, U.A.E. For more information, visit www.allynintl.com.